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JANUARY 21, 2011
FEATURE ARTICLE, PAGE 6
America’s Coming Debt
Limit Crisis
• Bank of Canada on Hold; Modestly Dovish
Despite Raising Growth Projection
• Strong Canadian Retail and Wholesale Trade
Offset Weak Manufacturing
• China’s Economy Accelerates
• U.K. CPI Jumps, Retail Sales Slump…
BoE Dilemma
• Brazil Hikes Rates
Our Thoughts
Three weeks into 2011, and markets are none the wiser. Stocks,
commodities and currencies have essentially fought to a draw, although
U.S. bond yields are still marching higher while gold has lost some shine.
Economic data and earnings have been generally positive, but not
strong enough to alter the landscape. That trend continued this week,
DOUGLAS PORTER with U.S. jobless claims easing markedly, home sales finishing 2010 with
a bounce, and the Philly and NY Fed surveys solid. However, home building remains
desperately weak, and mortgage applications for purchase are sagging amid the back-
up in Treasury yields, which has seen a 100 bp rise at the long end in just the past six
months. Even with a generally better outlook for the U.S. economy, and a welcome
dearth of double-dip chatter, broader markets are still wary amid three other major
concerns. We come not to bury those concerns, but also not to praise them either.
First, concern is growing that China’s hot growth and inflation will prompt even
more aggressive tightening there, leading to a sudden global slowdown. Those fears
were slightly allayed by news that the CPI eased to 4.6% y/y in December from the two-
year high of 5.1% the prior month. That calm lasted all of one day when it soon emerged
that GDP roared ahead 9.8% y/y in Q4, accelerating from 9.6% in Q3, and averaging a
rocking 10.3% for all of 2010. I vividly recall in the middle of last year some fretting that
Europe’s debt crisis would clobber China, leading to a marked slowdown. Some
clobbering. Some slowdown. But I digress. Commodities took it on the chin following
the GDP news, fearful that China will tighten much more dramatically. It may seem
frightfully old-fashioned, but there once was a time when news of strong growth
prompted strength in commodities. Now I realize that markets are forward looking, and
this GDP report covers ancient history (stretching back more than three weeks ago!), but
perhaps the more important point is just how robust the underlying trend in China’s
economy truly is. Even a more aggressive tightening campaign may not significantly
brake this locomotive, especially if U.S. demand begins to gather strength.
A second lingering concern is the ongoing debt trauma in Europe. While we
wouldn’t downplay this risk—debt never takes a holiday, and Europe faces years of
very real restraint—note that German business just reported to the Ifo that they are as
confident as they have ever been in 20 years of surveys. Now if businesses are
sanguine in the major country that is arguably the most exposed to the risks of an EU
sovereign debt blow-up, and/or potentially on the hook for most of the costs, why is
the rest of the world so fretful about the issue? Are we missing something, or are they
whistling past the graveyard? We would also note that, aside from the crisis countries,
European stocks enjoyed a rock solid year in 2010, and almost all markets there are off
to a fiery start in 2011, led by some of the PIIGS. And, sovereign bond spreads have
narrowed substantially since the start of the year, led by Spain—although we all know
that can turn on a dime.
Finally, a third concern that continues to ping-pong around in markets is the
hobbled finances of U.S. state and local governments. California Governor Brown
declared a state of emergency amid this year’s projected $25 billion shortfall in the
state, and a New York Times article suggested officials are pondering ways to allow
states to seek bankruptcy protection. The yields on state & local bonds have gapped
PAGE 2 – FOCUS – JANUARY 21, 2011
Our Thoughts
up more than 150 bps in the past three months alone, widening the spread with 20-
year Treasuries to more than 1 percent (when historically these tax-favoured issues
have yielded less than Treasuries). Again, we would not downplay the seriously sad
state of local finances, and closing the budget gaps will inflict very real restraint on the
economy this year. But note that local governments have already been dragging
heavily on the recovery, alone chopping 256,000 jobs in the past year (or 21,000 per
month). Moreover, while the totals sound daunting, the combined projected deficit of
the states is likely around US$125 billion, less than 1% of GDP and less than 1/10th of
Washington’s shortfall. Put another way, the bailout package for Ireland, with a
population of barely 4 million, was alone more than $115 billion. It’s a serious issue,
but lets keep some perspective.
The Canadian government’s decision to tighten mortgage rules for the
third time in three years should moderately dampen home sales and
prices this year, but only slightly restrain the economy. The moves to lower
the maximum refinancing amount from 90% to 85% of a home’s value,
and to no longer insure new home-equity lines of credit, will likely restrain
SAL GUATIERI borrowing and spending somewhat, particularly for renovations and
second homes (cottages, Florida retirement properties) and other big-ticket items often
funded through mortgage refinancing or HELOCs. However, most homeowners aren’t
brushing up against the current refinancing limit. According to the Canadian Association
of Accredited Mortgage Professionals, owners with mortgages had 50% equity in their
homes on average as of October 2010, and only about one-in-ten had less than 10%
equity. Fewer than one-in-five borrowers withdrew equity from their home or increased
their mortgage principle in the past year.
The more substantive impact will stem from the move to lower the maximum
amortization period (on insured mortgages) from 35 years to 30 years. This change,
after spurring an initial burst of activity before taking effect on March 18, will no doubt
persuade some buyers to rent (good news for landlords) and others to seek lower-
priced homes. For the typical buyer—putting 5% down on an average priced home
($345,000) financed at 4.5% interest (the typical 5-year fixed mortgage rate last
month)—the shorter term will increase annual mortgage costs by $1320. That’s
equivalent to a one-half percentage point increase in mortgage rates and a 7%
reduction in housing affordability, enough to squeeze marginal buyers out of the
market. Those buyers wanting to keep mortgage costs unchanged at the new 30-year
term will need to settle for, or bargain for, a house that costs 7% less than the one they
could have bought with the 35-year term, thereby putting some moderate downward
pressure on prices. Although the 30-year term will ultimately save homebuyers tens of
thousands of dollars in interest payments compared with the 35-year term, the annual
cost of servicing the mortgage will be $1320 higher, which is money that could be
spent on other things. How much money in aggregate? According to the CAAMP, 30%
of new mortgages had 35-year terms in the year to October (as well, 35-year terms
accounted for 8% of all mortgages). Even assuming, in the most conservative manner,
that the same proportion of buyers chooses a 30-year term going forward, and that
PAGE 3 – FOCUS – JANUARY 21, 2011
Our Thoughts
not a single buyer leaves the market or buys a lower-priced home, the higher average
mortgage cost ($1320) would apply to fewer than 160,000 home sales this year
(including a crude estimate of new home sales). This is less than a quarter billion
dollars, or a tiny 0.02% of disposable income.
All in, the new mortgage rules are unlikely to have a meaningful impact on
Canada’s economy this year, thus we still look for 2.7% growth. However, to the extent
that the changes will help reduce the risk of an unsustainable increase in both house
prices and household debt, they should weigh on the side of a more gradualist course
of monetary policy renormalization.
In 2010, copper extended a rally that began after hitting lows at the end
of 2008. There was marked volatility during the first half as markets
digested the demand implications of European sovereign debt, Chinese
monetary tightening, and a possible U.S. double-dip recession. However,
once these threats eased, copper scaled successive highs in the second
KENRICK JORDAN half, ending the year at a record high. The rally has continued unevenly in
January, with the LME benchmark hitting a record US$4.41/lb. on January 18th. Over
the past two years, copper outshone gold and many industrial metals by large margins
as its price almost tripled.
Several factors have driven the rally, including: robust growth in industrial
production, especially in emerging markets; paltry increases in supply due to a lack of
investment, falling ore grades and periodic supply disruptions; and heightened
investor interest. Demand has surprised on the upside partly due to stronger-than-
anticipated consumption in some advanced countries. Overall, with demand
outstripping supply, exchange inventories have fallen notably as the market has
moved sharply into deficit. LME inventories, for instance, have shrunk about one third
from peak levels last February.
Demand is projected to grow solidly again this year, and industrial use could prove
stronger than anticipated, given improving prospects in the U.S. and parts of Europe.
Likewise, investor demand, aided by physically-backed ETFs and substantial liquidity in
financial markets, could exceed expectations. Meanwhile, output growth is set to remain
sluggish, given a lack of new projects, declining ore grades, and the odds of supply
disruptions as mine workers seek a bigger share of the industry profit pie. With another
large market deficit on tap, there is the potential for another substantial price rise this year.
Two key risks to this outlook relate to: (i) the role of physically-backed ETFs in
facilitating investor participation and lifting prices, and (ii) the potential for a slowdown
in China. Rising demand by investors for copper-based ETFs and corresponding
increased purchases by fund managers to physically back their investment vehicles
ultimately build inventories. If an aggressive response by copper producers to high
prices eventually boosts supplies, this could cut prices. Such a decline could be
accelerated if investors exit their ETFs and fund managers are forced to sell their copper
into the market. Concerning China, it has so far managed to achieve strong economic
growth despite past tightening moves. However, it requires close monitoring, as China
remains the driver of global copper consumption.
PAGE 4 – FOCUS – JANUARY 21, 2011
Recap
Jennifer Lee, Senior Economist
GOOD NEWS BAD NEWS
CANADA
Retail Sales +1.3% (Nov.) Manufacturing Sales -0.8% (Nov.)
CANADA Wholesale Trade +1.2% (Nov.)
• BoC stays on hold, and MPR still Manufacturing New Orders +1.6% (Nov.)
sounds cautious
Leading Indicator +0.5% (Dec.)
• Ottawa announces tougher
Foreigners buy a net $8.0 bln of Canadian
mortgage rules
securities (Nov.)
U.S.
Initial Claims -37,000 to 404,000 (Jan. 15 wk) NAHB Housing Index unch at 16 (Jan.)
UNITED STATES Existing Home Sales +12.3% to 5.28 mln a.r. (Dec.) Housing Starts -4.3% to 529,000 a.r. (Dec.)
• Jobs outlook improves Building Permits +16.7% to 635,000 a.r. (Dec.)—but Redbook -0.6% (Jan. 15 wk)
• U.S.-China summit brings due to building code changes effective January Philly Fed Index -1.5 pts to 19.3 (Jan.)
US$45 bln in new trade deals Leading Indicator +1.0% (Dec.)
Empire State Manufacturing Survey +2.0 pts to
11.92 (Jan.)
Foreign net purchases of long-term U.S. securities
$85.1 bln (Nov.)
JAPAN
Tertiary Industry Index +0.6% (Nov.) Consumer Confidence slips 0.4 pts to 40.2 (Dec.)
JAPAN Department Store Sales -1.5% y/y (Dec.)
• Economy still sputtering All-Industry Activity Index -0.1% (Nov.)
EUROPE
Germany—Ifo Survey +0.8 pts to 110.3 (Jan.) Eurozone—Consumer Confidence slides to -11.4
EUROPE Germany—ZEW Survey +11.1 pts to 15.4 (Jan.) (Jan. A)
• Some ECB officials hawkishly France—Business Confidece +1 pt to 106 (Jan.) Germany—Producer Prices +0.7% (Dec.)
warn not to focus too much on Italy—Industrial Orders -4.3% (Nov.)
U.K.—Jobless Claims -4,100 (Dec.)
core prices
U.K.—Rightmove House Prices +0.3% (Jan.) U.K.—Consumer Prices +1.0% (Dec.)
• Eight-month high inflation
U.K.—Nationwide Consumer Confidence +8 pts to U.K.—Retail Sales -0.8% (Dec.)—weather related
pushes up BoE rate hike
expectations 53 (Dec.)
U.K.—RICS House Price Balance +5 pts to -39 (Dec.)
CHINA
Real GDP +9.8% y/y (Q4) Foreign Direct Investment slowed to
CHINA Industrial Production +13.5% y/y (Dec.) +15.6% y/y (2010)
• Economic growth remains Retail Sales +19.1% y/y (Dec.)
strong, but fans fears of further
Consumer Prices slowed to +4.6% y/y (Dec.)
tightening
Producer Prices cooled a tad to +5.9% y/y (Dec.)
Property Prices eased to +6.4% y/y (Dec.)
Fixed Asset Investment +24.5% y/y (2010)
Indications of stronger growth and a move toward price stability are good news for the economy.
PAGE 5 – FOCUS – JANUARY 21, 2011
Feature
America’s Coming Debt Limit Crisis
Michael Gregory, CFA, Senior Economist
This year marks the 70th anniversary of the Public Debt Act of 1941, legislation that clearly
established an aggregate limit for nearly all debt issued by the U.S. government (see the
Appendix for a brief discussion on the public debt). Lifting the debt limit is often politically
contentious, sometimes becoming a “crisis”. When an agreement to raise the debt ceiling isn’t
reached in time, and the limit is hit, the government can no longer issue net new debt. This is
when a crisis begins. Consider the current situation: Treasury is issuing net new debt to finance
the $1.4 trillion budget deficit, which includes interest payments on the $14 trillion debt
outstanding. The inability to issue net new debt would result in the U.S. government, technically,
defaulting on the debt.
Treasury Secretary Geithner wrote to Congress on January 6 stating that if the current $14.3
trillion limit is not lifted, public debt could hit the ceiling as early as March 31 and by as late as
May 16 (Chart 1). Mr. Geithner was not employing hyperbole when he argued that default would
cause “catastrophic damage to the economy, potentially much more harmful than the effects of the
financial crisis of 2008 and 2009.” With global financial markets already very sensitive to negative
sovereign credit news, the potential immediate impact on Treasury yields and other borrowing
costs in the U.S. economy could be explosive and recession-causing. All well-informed members
of Congress know this too, which is why debt limit crises are really nothing more than exercises
in political brinkmanship. But, the longer the delay in raising the ceiling, the more intense the
crisis becomes. Once at the limit, the more the Treasury must scramble to find funds to make
interest payments.
Fortunately, hitting the debt limit doesn’t automatically trigger default. Once a “debt issuance
suspension period” has been declared (which Mr. Geithner will have done by May 16 if the limit
is not lifted), Treasury can use various manoeuvres to free up a bit of borrowing room to keep
making interest payments and avoid defaulting on the debt (some have congressional approval,
others emerge from the power of the office). Fiddling with
government employee pension funds (that invest solely in
CHART 1 Treasury securities) is a common measure. Treasury can
LIMIT UP stop new investments or re-investments of maturing
United States (US$ trlns : month-end) securities, and even redeem securities early, in these funds.
Public Debt But there are limits to how much can be done, and the
16 funds must be made whole, including interest, afterwards.
14 In the past, Treasury has also altered the investments of
Limit other agencies, to smaller effect.
12
10 Outstanding This raises the issue of whether available manoeuvres,
given the growing magnitude of interest payments on the
8
public debt, will be adequate in the future—let alone in
6 the current situation. After the last time the debt ceiling
4 was raised on February 12, 2010, Secretary Geithner
97 99 01 03 05 07 09 11
decided to ramp up Treasury’s Supplementary Financing
PAGE 6 – FOCUS – JANUARY 21, 2011
Feature
Account at the Fed (Chart 2). This was originally
CHART 2 established during 2008 to help the Fed manage its
A NEW MANOEUVRE balance sheet (the Treasury issued securities to help
United States (US$ blns : month-end) absorb bank reserves, with the proceeds sitting idle in its
Treasury’s Supplementary Financing Account at the Fed account at the Fed). These funds topped more than $555
600 billion at the height of the financial crisis, but were
eventually drawn down to zero. On February 23, 2010,
500
Treasury announced that the program would be
400
reactivated to $200 billion (no mention about the Fed’s
300 balance sheet). Mr. Geithner can draw down on these
200 funds to make interest payments. Of course this would
mean that the funds would flow into the banking system
100
and boost banks’ reserves. Given that the Fed is
0 quantitative easing anyway, this shouldn’t pose a problem
08 09 10 11
for monetary policy.
CHART 3 Interestingly, the mere existence of congressionally-
TAKE IT TO THE LIMIT approved measures to help avoid defaulting probably
United States (US$ blns : month-end) makes it more likely that the debt ceiling debates will
Balance of Public Debt Limit drag on, and debt limits will be hit. Arguably, the most
2000 famous debt limit/budget crisis was the 1995-1996 clash
between the Clinton Administration and the Republican-
1500 led Congress, which included two government
shutdowns. But smaller crises occurred frequently before
1000 (which is why Congress approved Treasury’s ability to
fiddle with the pension funds back in the mid-1980s).
500 More recently, the public debt was taken to the limit in
2002 (twice), 2003, 2004 and early-2006 (Chart 3). During
0 the last three episodes, the Bush Administration was
97 99 01 03 05 07 09 11
dealing with a Republican-led Congress, so debt limit
crises are not all about partisan politics.
It’s hard to know how prone to political brinkmanship the upcoming debate will be. On the
positive side, the Obama Administration and the previous Congress agreed (including the
Republican leadership) on a fiscal stimulus package last month, suggesting that the debt limit
debate could be less divisive (although some of the new members are taking harder lines). Last
month, the bipartisan National Commission on Fiscal Responsibility and Reform also released their
report, fencing common ground around the inevitable associated debate about future fiscal
policy. However, a January 12 Ipsos/Reuters poll revealed that 71% of Americans oppose raising
the debt ceiling. Apart from showing that 71% of Americans don’t adequately understand the
issue they are being polled on, the populists and Tea Party types could seize on such misguided
sentiment to pressure increased congressional intransigence.
PAGE 7 – FOCUS – JANUARY 21, 2011
Feature
Bottom line: The current debt ceiling debate will likely go
TABLE 1 down to the wire, similar to many of its predecessors, and
$14 TRILLION... AND COUNTING perhaps elicit limit-skirting measures to make sure interest
United States (US$ blns : as of December 31, 2010) payments are made. In the end, the debt limit will be lifted
Public Debt before the government is ultimately forced to default.
Held by Intragovernmental
the Public Holdings Total * Appendix: Detailing the Debt
Marketable Securities 8,841 22 8,863
The U.S. public debt stood at $14,025 billion at the end of
Non-Marketable Securities 549 4,613 5,162
Total * 9,390 4,635 14,025 2010 (Table 1) and, despite its name, it’s not all held by the
“public” in the form of marketable Treasury securities (bills,
Not Subject to the Debt Limit 21 31 53
Subject to the Limit 9,369 4,603 13,972
notes, bonds and TIPs). About 33% of the public debt is
Statutory Debt Limit 14,294 intragovernmental holdings, mostly made up of
Balance of Statutory Debt Limit 321 nonmarketable Treasury securities that are mostly held by
* totals may not add up due to rounding
government trust funds as investments. For example, of
the $4,634 billion in intragovernmental holdings, more
than 56% is the two Social Security trust funds and almost
CHART 4
17% is the Civil Service Retirement and Disability Fund.
DEBTS AND DEFICITS
United States (US$ blns) Nearly all public debt (99.6%) is subject to debt limit.
400 14,000
Changes in the public debt do not match total budget
0 12,000 balances because these balances incorporate such things
Total 10,000 as the excess of social security contributions over benefit
-400 Budget payments (the latter are referred to as “off budget” items).
Balance 8,000
(lhs) Although this reduces the reported total budget deficit or
-800
6,000 raises the surplus, the Social Security trust funds are still
-1,200 Public credited with the premiums in the form of nonmarketable
Debt 4,000
(rhs) securities, and the public debt continues to rise. The year
-1,600 2,000
90 92 94 96 98 00 02 04 06 08 10 2000 was the only time that the public debt actually
Total Budget Balance = (12-mnth m.s.) Public Debt = (12-mnth m.a.) stabilized, as the surplus in “on-budget” items matched
the surplus in “off budget” items (Chart 4).
PAGE 8 – FOCUS – JANUARY 21, 2011
Economic Forecast
2010 2011 ANNUAL
CANADA I II III IV I II III IV 2010 2011 2012
Real GDP (q/q % chng : a.r.) 5.6 2.3 1.0 2.0 3.4 3.1 3.0 2.9 2.9 2.7 2.6
Consumer Price Index (y/y % chng) 1.6 1.4 1.8 2.1 2.1 2.6 2.4 1.5 1.7 2.1 1.9
Unemployment Rate (%) 8.2 8.0 8.0 7.7 7.6 7.6 7.5 7.4 8.0 7.5 7.2
Housing Starts (000s : a.r.) 198 199 192 182 170 179 182 185 193 179 182
Current Account Balance ($blns : a.r.) -36.7 -51.9 -70.1 -53.3 -55.5 -55.7 -54.3 -54.5 -53.0 -55.0 -57.0
Interest Rates
(average for the quarter : %)
Overnight Rate 0.25 0.33 0.83 1.00 1.00 1.17 1.50 1.83 0.60 1.38 3.06
3-month Treasury Bill 0.19 0.41 0.70 0.94 0.98 1.16 1.50 1.83 0.56 1.37 3.06
10-year Bond 3.47 3.47 3.01 3.00 3.24 3.26 3.45 3.64 3.24 3.40 4.04
Canada/U.S. Interest Rate Spreads
(average for the quarter : bps)
90-day 8 26 54 80 84 102 136 169 42 123 178
10-year -25 -2 22 13 -15 -3 -13 -22 2 -13 -40
UNITED STATES
Real GDP (q/q % chng : a.r.) 3.7 1.7 2.6 3.2 3.5 3.4 3.3 3.5 2.9 3.2 3.0
Consumer Price Index (y/y % chng) 2.4 1.8 1.2 1.2 1.3 1.8 1.9 1.5 1.6 1.6 1.5
Unemployment Rate (%) 9.7 9.6 9.6 9.6 9.4 9.2 8.9 8.7 9.6 9.1 8.3
Housing Starts (mlns : a.r.) 0.62 0.60 0.59 0.54 0.58 0.61 0.64 0.70 0.59 0.63 0.85
Current Account Balance ($blns : a.r.) -437 -493 -509 -482 -494 -501 -509 -516 -480 -505 -510
Interest Rates
(average for the quarter : %)
Fed Funds Target Rate 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 1.29
3-month Treasury Bill 0.11 0.15 0.15 0.14 0.14 0.14 0.14 0.14 0.14 0.14 1.29
10-year Note 3.72 3.49 2.79 2.86 3.39 3.29 3.58 3.86 3.21 3.53 4.44
EXCHANGE RATES
(average for the quarter)
US¢/C$ 96.0 97.3 96.3 98.7 99.7 100.0 100.9 102.1 97.1 100.7 101.2
C$/US$ 1.041 1.028 1.039 1.013 1.003 1.000 0.991 0.979 1.030 0.993 0.989
¥/US$ 91 92 86 83 84 84 84 85 88 84 90
US$/Euro 1.38 1.27 1.29 1.36 1.31 1.27 1.28 1.33 1.33 1.30 1.30
US$/£ 1.56 1.49 1.55 1.58 1.54 1.51 1.53 1.58 1.55 1.54 1.57
Note: Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast
PAGE 9 – FOCUS – JANUARY 21, 2011
Key for Next Week
CANADA Douglas Porter, CFA, Deputy Chief Economist
Consumer Price Index Canadian consumer prices have dropped in each of the past two Decembers on
Tuesday, 7:00 am heavy-duty discounting and lower energy prices. We suspect 2010 will show a
m/m (nsa) y/y different result, as gasoline prices powered up more than 3% in the month, and at
Dec. (e) +0.1% +2.4%
(+0.4% sa) least some of the typical seasonal discounting may have been brought forward into
Consensus +0.2% +2.5% November (as some Canadian stores mimicked the U.S. Black Friday). Accordingly, we
Nov. +0.1% +2.0%
are looking for a 0.1% m/m rise in overall prices (or roughly 0.4% in seasonally
Core CPI
Dec. (e) +1.7% y/y adjusted terms, nearly matching the 0.5% rise seen in the U.S. CPI last month). Even
Consensus +1.6% y/y this modest rise would be enough to bump up the inflation rate to 2.4% y/y, and could
Nov. +1.4% y/y
push up the average inflation rate for all of 2010 to 1.8% (from a microscopic 0.3% in
2009). Recall that the HST added 0.7 percentage points to the inflation rate, and
without that special factor, underlying inflation would still be comfortably below 2%.
The Bank of Canada’s measure of core CPI is expected to dip 0.1% in December, but,
due to much heavier discounts a year ago, that would still lift the annual trend to 1.7%
(from a low 1.4% in November). The Bank looks for core CPI to dip to a 1.4% y/y
average in Q1, and then begin grinding higher through 2011 and 2012, finishing next
year at 2%. Core inflation will take a big temporary spill in two months, when a
temporary Olympics-related jump falls out of the index.
UNITED STATES Sal Guatieri, Senior Economist
Conference Board Consumer Rising equities and falling Social Security contributions likely lifted consumer spirits
Confidence Index modestly in the New Year, despite the hangover from higher gasoline prices. Barring a
Tuesday, 10:00 am sharper increase, however, confidence will have made little headway in the past year.
Jan. (e) 53.0
Consensus 54.2
While much improved from the Great Recession lows, consumer sentiment appears
Dec. 52.5 stuck at typical recession levels until job growth strengthens.
New Home Sales New home sales likely rose for the second straight month in December, albeit from
Wednesday, 10:00 am rock-bottom levels. Even an expected 5% increase to 305,000 units (annualized) would
Dec. (e) 305,000 a.r. (+5.0%) leave sales at less than half their normal rate and not far from last summer’s all-time
Consensus 300,000 a.r. (+3.4%)
Nov. 290,000 a.r. (+5.5%) low (274,000). A flood of cheap distressed properties continues to siphon demand
from the new home market. Despite lean supply on builder lots, prices have slipped in
the past year owing to even leaner demand. Still, a portion of the recent pickup in
resale demand should start to rub off on the new home market.
Fed Policy Meeting A lineup change should result in the first FOMC meeting since December 2009
Announcement on without a dissenting vote. Although two hawkish regional presidents (Plosser and
Wednesday, 2:15 pm Fisher) will replace one (Hoenig), neither are expected to vote against ending the
current Treasury purchase program (which is slated to run through June), though they
won’t actually give it a ringing endorsement either. Look for the press statement to
assert that, while the recovery has become more self sustaining, further progress is
needed to meaningfully reduce unemployment and deflation risks. Also look for the
statement to retain the “extended period” language on maintaining low rates.
PAGE 10 – FOCUS – JANUARY 21, 2011
Key for Next Week
Durable Goods Orders After dipping in November, durable goods orders likely rebounded 1.5% in December
Thursday, 8:30 am on the back of higher aircraft and machinery sales. Capital goods orders (excluding
Dec. (e) +1.5% +0.8% aircraft and defense) likely rose for the second straight month, indicating that business
Consensus +1.5% +1.0%
Nov. -0.3% +3.6% capital spending continues to grow strongly, likely by 8% annualized in Q4 following
the fastest pace in a quarter century in the previous year (19%).
Real GDP The U.S. economy likely ended 2010 on an upswing, growing an estimated 3.2%
Friday, 8:30 am annualized compared with 2.6% in Q3. Business capital spending and exports
GDP Deflator probably remained solid, while consumers look to have put in their best showing (4%)
Q4 A (e) +3.2% a.r. +1.4% a.r.
Consensus +3.5% a.r. +1.7 % a.r. in four years. But not every cylinder in the economy is pumping. Soft spots likely
Q3 +2.6% a.r. +2.1 % a.r. include a further slide in residential and commercial construction, less inventory
rebuilding (after a record boost in Q3), and ongoing belt-tightening at the municipal
level. Despite these speed-bumps, however, the recovery train keeps chugging along
now that the consumer has hopped on board. Final sales (GDP less inventories)
probably grew 5%, the fastest clip in 4½ years.
PAGE 11 – FOCUS – JANUARY 21, 2011
Financial Markets Update
CHANGE FROM: (BASIS POINTS)
JAN 21 * JAN 14 WEEK AGO 4 WEEKS AGO DEC. 31/10
Canadian Money Market
Call Money 1.00 1.00 0 0 0
Prime Rate 3.00 3.00 0 0 0
U.S. Money Market
Fed Funds (effective) 0.25 0.25 0 0 0
Prime Rate 3.25 3.25 0 0 0
3-Month Rates
Canada 0.97 0.96 1 -1 0
United States 0.15 0.15 1 2 3
Japan 0.20 0.11 9 7 8
Eurozone 1.03 1.01 2 1 2
United Kingdom 0.78 0.77 1 2 2
Australia 4.91 4.91 0 1 1
Bond Markets
2-year Bond
Canada 1.74 1.78 -5 3 6
United States 0.62 0.57 5 -3 2
10-year Bond
Canada 3.34 3.27 8 18 22
United States 3.45 3.33 12 5 15
Japan 1.21 1.21 0 5 8
Germany 3.18 3.03 15 20 22
United Kingdom 3.70 3.61 9 19 31
Australia 5.65 5.55 11 -2 11
Risk Indicators
VIX 17.0 15.5 1.5 pts 0.5 pts -0.8 pts
TED Spread 15 16 -1 -2 -3
Inv. Grade CDS Spread ** 85 83 1 -1 0
High Yield CDS Spread ** 416 411 5 -21 -14
Currencies (% CHANGE)
US¢/C$ 100.73 100.92 -0.2 1.6 0.5
C$/US$ 0.993 0.991 — — —
¥/US$ 82.74 82.87 -0.2 -0.2 2.0
US$/Euro 1.3556 1.3388 1.3 3.3 1.3
US$/£ 1.597 1.587 0.6 3.4 2.3
US¢/A$ 98.94 98.88 0.1 -1.5 -3.3
Commodities
CRB Futures Index 333.40 333.06 0.1 1.2 0.2
Oil (generic contract) 89.25 92.57 -3.6 -2.5 -2.3
Natural Gas (generic contract) 4.72 4.48 5.3 15.5 7.1
Gold (spot price) 1342.58 1361.72 -1.4 -2.8 -5.5
Equities
S&P/TSX Composite 13372 13464 -0.7 -0.1 -0.5
S&P 500 1286 1293 -0.5 2.4 2.3
Nasdaq 2712 2755 -1.6 1.7 2.2
Dow Jones Industrial 11875 11787 0.7 2.6 2.6
Nikkei 10275 10499 -2.1 0.0 0.4
Frankfurt DAX 7090 7076 0.2 0.5 2.5
London FT100 5924 6002 -1.3 -1.4 0.4
France CAC40 4036 3983 1.3 3.5 6.1
S&P ASX 200 4756 4802 -1.0 -0.5 0.2
* as of 10:30 am ** One day delay
PAGE 12 – FOCUS – JANUARY 21, 2011
JANUARY 24 – JANUARY 28 Global Calendar
MONDAY JANUARY 24 TUESDAY JANUARY 25 WEDNESDAY JANUARY 26 THURSDAY JANUARY 27 FRIDAY JANUARY 28
JAPAN
Merchandise Trade Surplus CPI Core CPI
Dec. ’10 (e) ¥465 bln Dec. (e) -0.1% y/y -0.5% y/y
Dec. ’09 (e) ¥543 bln Nov. +0.1% y/y -0.5% y/y
Jobless Rate
Dec. (e) 5.1%
Nov. 5.1%
Retail Sales
Bank of Japan Monetary Policy Meeting (January 24-25) BoJ Monthly Report
Dec. (e) -1.4% +0.6% y/y
Nov. +2.1% +1.5% y/y
Household Spending
Dec. (e) -0.6% y/y
Nov. -0.4% y/y
EUROZONE
EUROZONE GERMANY ITALY EUROZONE EUROZONE
Manufacturing PMI GfK Consumer Confidence Retail Sales Economic Confidence M3 Money Supply (smoothed)
Jan. A (e) 57.0 Feb. (e) 5.4 Nov. (e) unch -0.8% y/y Jan. (e) 106.7 Dec. (e) +1.6% y/y
Dec. 57.1 Jan. 5.4 Oct. +0.3% -0.6% y/y Dec. 106.2 Nov. +1.3% y/y
Services PMI FRANCE GERMANY
Jan. A (e) 54.3 Consumer Spending Consumer Price Index
Dec. 54.2 Dec. (e) +0.3% +0.5% y/y Jan. P (e) -0.4% +2.2% y/y
Industrial New Orders Nov. +2.8% +1.5% y/y Dec. +1.2% +1.9% y/y
Nov. (e) +2.0% +17.1% y/y
Oct. +1.4% +14.8% y/y
U.K.
Real GDP
Q4 A (e) +0.5% +2.6% y/y
Q3 +0.7% +2.7% y/y Minutes from the January 12-13
BoE Monetary Policy Meeting
OTHER
AUSTRALIA AUSTRALIA
Producer Price Index Consumer Price Index
Q4 (e) +0.5% +3.2% y/y Q4 (e) +0.8% +3.0% y/y
Q3 +1.3% +2.2% y/y Q3 +0.7% +2.8% y/y
Reserve Bank of India
Monetary Policy Meeting
JANUARY 24 – JANUARY 28 North American Calendar
MONDAY JANUARY 24 TUESDAY JANUARY 25 WEDNESDAY JANUARY 26 THURSDAY JANUARY 27 FRIDAY JANUARY 28
CANADA
Ottawa’s Budget Balance ** 7:00 am Consumer Price Index 8:30 am Payroll Employment
Nov. ’10 m/m (nsa) y/y Nov. (e) +14,000
Nov. ’09 -$4.4 bln Dec. (e) +0.1% +2.4% Oct. -10,447
(+0.4% sa)
Consensus +0.2% +2.5%
Nov. +0.1% +2.0%
7:00 am Core CPI
Dec. (e) +1.7% y/y
Consensus +1.6% y/y 12:05 pm 2-year bond auction
Nov. +1.4% y/y $3.0 bln
(New cash $3.0 bln) 10-year bond auction announcement
UNITED STATES
8:55 am Redbook Same-Store Sales 7:00 am MBA Mortgage Apps 8:30 am Initial Claims 8:30 am Real GDP
Jan. 22 Jan. 21 Jan. 22 (e)409k (+5k) * GDP Deflator
Jan. 15 (mtd) -0.6% m/m +2.7% y/y Jan. 14 +5.0% Jan. 15 404k (-37k) Q4 A (e) +3.2% a.r. +1.4% a.r.
9:00 am S&P Case-Shiller Home 10:00 am New Home Sales 8:30 am Continuing Claims Consensus +3.5% a.r. +1.7 % a.r.
Price Index Dec. (e) 305,000 a.r. (+5.0%) Jan. 15 (e)3,880k (+19k) * Q3 +2.6% a.r. +2.1 % a.r.
Nov. (e) -1.4% y/y Consensus 300,000 a.r. (+3.4%) Jan. 8 3,861k (-26k) 8:30 am Employment Cost Index
Oct. -0.8% y/y Nov. 290,000 a.r. (+5.5%) 8:30 am Durable Q4 (e) +0.5% +2.0% y/y
10:00 am FHFA House Price Index Goods Ex. Consensus +0.5% +2.0% y/y
Nov. (e) -3.6% y/y Orders Transport Q3 +0.4% +1.9% y/y
Oct. -3.4% y/y Dec. (e) +1.5% +0.8% 9:55 am Univ. of Michigan
10:00 am Conference Board Consensus +1.5% +1.0% Consumer Sentiment
Consumer Confidence Nov. -0.3% +3.6% Jan. F (e) 73.0
Index 10:00 am Pending Home Sales Consensus 73.0
Jan. (e) 53.0 Dec. (e) -1.0% Jan. P 72.7
Consensus 54.2 Consensus +1.0% Dec. 74.5
Dec. 52.5 Nov. +3.5%
5:00 pm ABC News Consumer
Comfort Index
Jan. 23
Jan. 16 -43
9:00 pm President Obama’s
State of the Union Address
FOMC Meeting (Announcement on Wednesday, 2:15 pm)
11:00 am 13- & 26-week bill auction
announcements
11:30 am 13- & 26-week bill auction 1:00 pm 2-year note auction 1:00 pm 7-year note auction
$57.0 bln $35.0 bln $29.0 bln
Fed to purchase $7-9 bln of notes Fed to purchase $8-9 bln of notes 1:00 pm 5-year note auction Fed to purchase $4-6 bln of bonds Fed to purchase $7-9 bln of notes
(July 2016-Dec. 2017) (Jan. 2015-June 2016) $35.0 bln (July 2012-July 2013) (Feb. 2018-Nov. 2020)
* consensus ** date approximate Upcoming Policy Meetings Bank of Canada: Mar. 1, Apr. 12, May 31 FOMC: Mar. 15, Apr. 26-27, June 21-22
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PAGE 15 – FOCUS – JANUARY 21, 2011
